Deutsche Bank at Risk in ECB’s Stress Test, Analysts Say

Deutsche Bank AG, Germany’s largest lender, is at risk of failing the European Central Bank’s stress test based on its financial standing before it sold shares to raise capital this year, analysts said.

The 8.5 billion euro ($10.8 billion) share sale in the second quarter is probably enough to cover any capital shortfall identified in the test, based on the bank’s 2013 accounts, according to analysts at Bankhaus Lampe and Bankhaus Metzler.

“You can’t rule out that Deutsche Bank would fail the stress test when excluding the capital they raised this year,” Guido Hoymann, an analyst at Bankhaus Metzler in Frankfurt, said by phone today. “It’s conceivable that without those funds, they fall to around or just under the threshold.”

To pass, banks must show they can maintain a ratio of common equity Tier 1, a measure of a bank’s ability to absorb losses, to risk-weighted assets of 8 percent under current conditions and 5.5 percent under a simulated slump. Deutsche Bank’s capital ratio rose to 14.7 percent at the end of June from 13.2 percent three months earlier, company filings show.

Two other analysts, who asked to remain anonymous, said it is possible Deutsche Bank will fail the stress test considering it ignores the equity raised this year.

The ECB inspected the accounts of about 130 firms to ferret out bad assets before running them through adverse scenarios to test the banks’ ability to absorb economic blows. The results of the yearlong exercise are due out Oct. 26, part of the central bank’s effort to restore confidence in the financial system before taking over banking supervision next month.

Ronald Weichert, a spokesman for Frankfurt-based Deutsche Bank, said the company doesn’t have its results and declined to comment further when reached by phone today. The ECB said in an e-mailed statement today that it won’t comment on individual institutions in its tests and that “any inferences drawn as to the final outcome of the exercise would be highly speculative.”

Deutsche Bank could fail the stress test if the ECB orders it to revalue assets as part of the preceding balance sheet review, said Neil Smith, an analyst at Bankhaus Lampe in Dusseldorf. The ECB may force Deutsche Bank to take a different view of its level-three assets, which are so complex and illiquid that the company values them with internal models rather than market prices, he said.

Hoymann recommends investors sell Deutsche Bank shares, predicting the bank will see profit sapped by costs from legal settlements and regulatory fines. Smith says buy.

Some investors consider it improbable that Deutsche Bank will fail. A Goldman Sachs Group Inc. survey found “investors assign a low probability to ‘national champions’ in the largest EU countries failing the test,” the investment bank said in an e-mailed report this week, referring to the European Union. Investors expect nine banks to fail the tests and seek to raise 38 billion euros to 51 billion euros in capital increases, Goldman Sachs analysts based in London wrote in the report.

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